2424‑0397

第 72 巻 第 2 号
2022 年 9 月

大阪大学経済学会
大阪大学大学院経済学研究科

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評議員 （ABC 順）鴋澤歩（編集） Benjamin Michel Claude Poignard

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大阪大学経済学
目

第72巻

第2号

次

論文
Reexamining Ownership Structure, ESG Engagements, and Corporate Financial Performance:
The Nonlinear Relationship in Japan …………………………………………… Wenjun Kuang

1Vol. 72 No. 2

OSAKA ECONOMIC PAPERS

September 2022

Reexamining Ownership Structure, ESG Engagements,
and Corporate Financial Performance: The Nonlinear
Relationship in Japan＊
Wenjun Kuang †Abstract
This study examines the nonlinear effects of ownership structures on environmental, social, andgovernance (ESG) performance in Japan and investigates the nonlinear relationship between
ESG and corporate financial performance. The results suggest an inverted U-shaped relationshipbetween foreign ownership and ESG performance and a U-shaped relationship between managerial
ownership and ESG performance. However, the effect of institutional ownership on ESG is positiveand linear. The results of the ESG pillars indicate that the above foreign ownership-ESG link issignificant only in the social and environmental pillars, while the above managerial ownership-ESG
link is significant in the social, governance, and environmental pillars. Further evidence indicatesthat ESG links to corporate financial performance through an inverted U-shaped pattern, andsuch relationships mainly result from the social pillar and governance pillar when the dependent
variables are firm values (e.g., Tobin’s Q) and profitability (e.g., operating income on assets andreturn on equity), respectively. These findings contribute to the understanding of the relationships
between ownership structures and firms’ ESG performance as well as the effects of ESG on
financial performance in the Japanese capital market.
JEL Classification: M41
Keywords: ESG performance; Ownership structure; Corporate financial performance; Nonlinear
relationship

1. Introduction
With the emerging concerns about how to achieve sustainable development goals (SDGs), firms
are increasingly expected to undertake environmental, social, and governance (ESG) activities and＊†This work was supported by JST SPRING, Grant number JPMJSP2138. I would like to express thanks to Professor
Atsushi Shiiba for his comments, advice, and suggestions. I also thank the Center for Mathematical Modeling and Data
Science (MMDS) for offering the Refinitiv database. Any remaining errors are, naturally, the sole responsibility of theauthor.
Graduate Student, Graduate School of Economics, Osaka University (Email: winniekwj@gmail.com)

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consider social interests.1 For several decades, numerous economic and non-economic determinantsof corporate social responsibility (CSR) have been examined in research (Oh et al., 2011). For
instance, available empirical evidence (e.g., Harjoto and Jo, 2011; Khan et al., 2013) documents
the effects of corporate governance mechanisms on firms’ CSR choices and emphasizes the role ofownership structure. However, the results of the relationships between major shareholders’ ownershipand socially responsible performance have been mixed.2 Moreover, despite abundant studies on thecosts and benefits of firms’ socially responsible behaviors, there is no consensus on the nature of
the relationship between ESG and corporate financial performance (CFP).3 Given the inconsistentempirical evidence in the previous literature and the scant research in non-Western contexts, this study
plans to reexamine the research framework regarding the determinants and consequences of ESG in
the Japanese setting.
The purpose of this study is to reconcile the above inconsistency by providing evidence of thenonlinear relationship between ownership structure and ESG as well as the nonlinear relationshipbetween ESG and CFP. I focus on the Japanese stock market because its unique institutional
environment provides a good opportunity to do so. Specifically, the Japanese ownership structurefeatures the dominance of stable shareholdings arrangements made through cross-owned networks(Douthett and Jung, 2001; Shuto and Kitagawa, 2011), where value-relevant information is sharedexclusively within the grouping (Sheard, 1991). This environment may influence information
asymmetry among different types of owners (e.g., institutional ownership, managerial ownership, andforeign ownership) (Suto and Takehara, 2018), and the level of information transparency (including
both financial and non-financial information) is regarded as an important factor affecting theirdecisions (Jiang and Kim, 2004). Owing to insufficient disclosure practices in the Japanese market(Suto and Takehara, 2018), such a feature may further impact firms’ non-financial (ESG) strategies.
Thus, the relationship between the ownership of different shareholders and ESG performance might
be more effectively captured in Japan than in other countries.
First, I hypothesize that the ownership structure affects ESG performance through a nonlinear pattern.
Specifically, I propose the following hypotheses: (1) there is an inverted U-shaped relationshipbetween institutional ownership and ESG performance; (2) there is an inverted U-shaped relationship
1

2

3

KPMG’s (2020) survey shows that approximately 80% of the top 100 companies across 52 countries report theirsustainability activities publicly, an increase from just over 50% in 2008. In particular, 100% of the top companies inJapan report on sustainability.
For example, some studies find that managerial ownership has a positive effect on corporate social performance (e.g.,
Johnson and Greening, 1999), while others document a negative relationship between managerial ownership and CSR
performance or disclosure (e.g., Ghazali, 2007; Barnea and Rubin, 2010; Oh et al., 2011; Khan et al., 2013). Similarly,
some studies suggest a positive effect of institutional ownership on CSR (e.g., Oh et al., 2011), while others find anegative effect (e.g., Arora and Dharwadkar, 2011; García‐Meca and Pucheta‐Martínez, 2018) or no significant effects(e.g., Barnea and Rubin, 2010).
Specifically, some studies find a positive effect of CSR on CFP (e.g., Ruf et al., 2001; Gregory et al., 2014), whileothers find a negative effect (e.g., Hillman and Keim, 2001; Brammer et al., 2006) or no significant effects (Teoh et al.,1999).

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Reexamining Ownership Structure, ESG Engagements, and Corporate Financial Performance: The Nonlinear Relationship in Japan－3－

between foreign ownership and ESG performance; and (3) there is a U-shaped relationship between
managerial ownership and ESG performance. Furthermore, I hypothesize that (4) increased ESG
performance displays an inverted U-shaped relationship with corporate financial performance.
To examine the above hypotheses, I follow Oh et al. (2017) and Meier et al. (2021) to use thequadratic equation in ordinary least square (OLS) regression with robust standard errors to correct
for heteroskedasticity. Using 4,337 firm-year observations from 2002 to 2017 for Hypothesis 1 and
4,003 firm-year observations from 2002 to 2017 for Hypothesis 2,4 I find that foreign ownership has
an inverted U-shaped effect on ESG, while managerial ownership has a U-shaped effect on ESG. Thissuggests that ESG performance improves as foreign ownership increases but decreases once the levelof foreign ownership reaches a critical mass. In contrast, managers with low or high levels of shares
have strong incentives to invest in ESG, while they tend to reduce social engagements at intermediatelevels of ownership. However, the relationship between institutional ownership and ESG is shown
to be a positive linear pattern. Further results indicate that ESG has an inverted U-shaped effect on
corporate financial performance, showing that there is an optimal social performance for a firm’s
financial performance.
This study contributes to the ESG literature in several ways. First, it challenges the traditional linear
models and aims to reconcile the inconsistency of previous findings by investigating the nonlinear
models. Given the scant literature that has proposed a nonlinear relationship between ownership
structure and ESG (e.g., Oh et al., 2017) and a nonlinear relationship between ESG and CFP (e.g.,
Fuji et al., 2013; Sun et al., 2019; Meier et al., 2021), this study enriches the literature by exploring
the nature of ownership structure-ESG relationship as well as the ESG-CFP link. Second, this study
extends previous research by examining the determinants and consequences of ESG in a Japanesesetting. As most previous studies use U.S. or European samples and there is a lack of research
focusing on Asian contexts (Chang et al., 2017), this study enriches the previous studies by providing
supplementary evidence from Japan. Finally, the findings of this study may have important policy
implications for different shareholders and managers.
The remainder of this paper is organized as follows. Section 2 provides a literature review anddevelops the hypotheses. Section 3 presents the research design of the study. Section 4 presents theempirical results and robustness checks. Finally, Section 5 concludes the study.
2. Literature Review and Hypothesis Development
2.1 Literature Review
Ownership Structure and ESG Performance
It has been documented that ownership structures can influence organizational behaviors such as social
4

The final sample sizes of four measures of corporate financial performance are different. Please see Panel B of Table 1.

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and environmental activities (Arora and Dharwadkar 2011; Oh et al., 2017). Moreover, different typesof owners have divergent orientations and preferences regarding corporate decisions and investments,
and thus have different effects on socially responsible investments (Oh et al., 2011).5 Specifically,
Johnson and Greening (1999) find that top management equity is positively related to corporate social
performance (CSP) in the product quality dimension. Ghazali (2007) finds that director ownershiphas a negative influence on CSR disclosure in Malaysian firms’ annual reports. Barnea and Rubin(2010) show that insider ownership is negatively related to a firm’s social rating, while institutional
ownership is uncorrelated with it. Oh et al. (2011) use Korean samples and show a significant positive
relationship between CSR ratings and ownership by institutions and foreign investors. By contrast,
there is a negative relationship between shareholding by top managers and CSR ratings. Khan et al.
(2013) further indicate a negative association between managerial ownership and the level of CSR
disclosures and a positive association between foreign ownership and CSR disclosures in Bangladeshi
companies.
Given the inconclusive evidence provided by the prior research, Oh et al. (2017) argue that themechanisms through which ownership affects socially responsible strategies are complex, and thenonlinear model may help reconcile the existing empirical inconsistency. Their results suggest thatthe relationship between insider ownership and CSR is a U-shaped pattern and that the relationshipbetween institutional ownership and CSR is an inverted U-shape. In general, there is limited literatureon the nonlinear relationship between ownership structure and ESG performance.
ESG Engagements and Corporate Financial Performance
Whether it is worthwhile for organizations to pay attention to societal demands is a long-standing
question. According to Friedman’s (1970) shareholder theory, managers’ only responsibility is
to increase shareholders’ wealth, and they have no right to spend money for purposes other thanincreasing profits (Nollet et al., 2016). Under the agency theory of Jensen and Meckling (1976),
managers have incentives to invest in CSR to fulfil their own interests, and CSR itself is a potential
agency cost. The benefits of CSR investment are obtained by insiders, but the risks and costs are paidby other shareholders (Barnea and Rubin, 2010). Therefore, this suggests that socially responsible
investments will deteriorate corporate financial performance. In this regard, Boyle et al. (1997)
investigate how investors perceive the effects of social responsibility information on firm value andfind that the market reacts negatively to both the signers and non-signers of the defense industries
initiative (DII). Hillman and Keim (2001) find that social issue participation is negatively associatedwith shareholder value. Brammer et al. (2006) examine the relationship between CSP and CFP
measured using stock returns and find that firms with higher social performance scores tend to achieve
lower returns. More recently, Buchanan et al. (2018) find that socially responsible firms are hit harder
during the financial crisis, which supports the overinvestment hypothesis.
5Specifically, Oh et al. (2011) break down owners into three separate categories: institutional ownership, managerial
ownership, and foreign ownership.

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In contrast, Freeman’s (1994) stakeholder theory argues that managers have a fiduciary responsibility
to all stakeholders, not just shareholders. Thereby, socially responsible engagements can be regarded
as “strategic CSR” which is consistent with the strategy of maximizing profit (Baron, 2001). Empiricalevidence supports this argument. For instance, Ruf et al. (2001) show that change in corporate social
performance is positively associated with sales growth for the current and subsequent year. Moreover,there is a positive relationship between return on sales and the change in corporate social performancefor the third financial period. Schnietz and Epstein (2005) find that a firm’s reputation gained fromsocial responsibility activities could protect it from stock declines associated with a crisis. Servaes
and Tamayo (2013) further show that CSR activities can enhance the value of firms with high publicawareness. Gregory et al. (2014) find that firms with high CSR levels have a higher expected growthrate in their abnormal earnings.
However, some studies suggest that the above linear relationship between social performance and
CFP can be problematic and propose that previous inconsistent findings can be explained by nonlinear
models. Theoretically, Marom (2006) proposes a unified theory showing a tendency toward an
inverted U-shaped relationship between CSR and CFP. Brammer and Millington (2008) argue thatboth U-shaped and inverted U-shaped relationships between CSR and CFP may exist, based on
conceptual frameworks.6 Empirically, Nollet et al. (2016) provide evidence of a U-shaped relationshipbetween CSP and the accounting-based measures of CFP. Sun et al. (2019) find that an initial increase
in CSR engagement could increase shareholder value, but the effect becomes negative at high CSRlevels. Meier et al. (2021) demonstrate a significant quadratic (inverted U-shaped) relationshipbetween human resource management (HRM)–CSP and CFP.
Ownership Structure, ESG Engagements, and Corporate Financial Performance in Japan
Prior studies suggest that the unique feature of ownership structure in Japan is that stable shareholding
which comprises cross-shareholdings and financial institutions is a common practice in the Japaneseequity market, involving implicit long-term contracts between firms and stable shareholders (Douthettand Jung, 2001; Shuto and Kitagawa, 2011; Shuto and Iwasaki, 2014; Kuang, 2022). This uniquefeature may influence the information asymmetry among different types of owners (Suto andTakehara, 2018), which may further impact firms’ ESG strategies. For instance, Suto and Takehara(2018) emphasize the role of foreign investors in the Japanese capital market and find that foreign
investors not only prefer high CSP firms but also enforce CSP among Japanese firms since the late
2000s. Endo (2020) finds that foreign blockholders significantly constrain environmental performance,
while domestic blockholders do not have a significant effect on environmental performance.
Existing Japanese studies have also documented inconclusive findings regarding the relationshipbetween ESG and CFP. Specifically, Iwata and Okada (2011) indicate different effects of
6

They also provide empirical evidence that firms with unusually high or low CSP have higher financial performance
than other firms, suggesting that the relationship between CSP and CFP may be U-shaped.

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environmental performance on financial performance. For example, greenhouse gas reduction
increases financial performance in the whole sample and clean industries, whereas waste emissions
generally do not have significant effects on financial performance. Suto and Takehara (2016) findthat the effects of corporate social performance on profitability are mixed. The composite CSR is
negatively associated with most profitability measures, whereas the employee relationship pillar is
positively associated with profitability. Shirasu and Kawakita (2021) find that CSR activities are
positively related to financial performance as measured by long-term stock returns. Only a few
studies have examined the nonlinear effect of ESG on CFP. For example, Fuji et al. (2013) find asignificant inverted U-shaped relationship between ROA and environmental performance calculatedby aggregated toxic risk.
Given the diverging findings and limited evidence in Japan, this study aims to fill this research gap by
exploring the nonlinear relationship between ownership structure and ESG engagement, as well as thenonlinear relationship between ESG and corporate financial performance.
2.2 Hypothesis Development
Effects of Institutional Ownership on ESG
Extant literature has investigated the role of institutional investors in monitoring, disciplining,
and influencing corporate managers’ behaviors (Chung et al., 2002). Unlike individual investors,
institutional investors are more sophisticated and tend to search for long-term value rather thanmyopically focusing on near-term profits (Bushee, 1998). In the case of Japan, stable shareholdings
with long-term investment horizons made through cross-shareholdings and financial institutions
dominate the Japanese equity market (Douthett and Jung, 2001). Such institutional investors are
considered “friendly” insiders and can encourage managers to make decisions that focus on long-term
firm value (Shuto and Iwasaki, 2014). Since returns from ESG investments are expected to be realized
mostly in the long run (Oh et al., 2011), stable institutional investors in Japan might support socially
responsible engagements. Moreover, institutional investors are risk-averse (Chaganti and Damanpour,1991) and may change their stable relationships with a firm by selling their shares if they perceive
great risk and uncertainty (Shuto and Iwasaki, 2014). By choosing a similar but socially responsible
company, they can achieve the same return with less risk (Graves and Waddock, 1994). Thus, ESG
can be viewed as a risk-reducing measure, and institutional investors will be in favor of high social
performance.
However, institutional directors with different levels of ownership may provide different outcomesfor firms’ social performance. Specifically, the role of institutional investors can be ambiguous when
institutional ownership is high. The monitoring activities by institutional investors can be costly andmay cause principal agency conflicts that arise when majority shareholders abuse their ownershipcontrol (Young et al., 2008; García‐Meca and Pucheta‐Martínez, 2018). Conflicting preferences
regarding social engagements may have a detrimental impact on ESG performance (e.g., conflicting

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voices from multiple institutional investors may deter the continuous commitment to CSR) (Oh etal., 2017). Empirically, García‐Meca and Pucheta‐Martínez (2018) find that institutional directors
negatively impact CSR reporting.
Therefore, I predict that there will be a nonlinear relationship between institutional ownership and
ESG performance. Institutional ownership may have positive effects on ESG as it increases from a
low to an intermediate level, while having negative effects on ESG at a high level of institutional
ownership. Therefore, I propose the following hypothesis:
H1a There is a nonlinear (inverted U-shaped) relationship between institutional ownership and ESG
performance.
Effects of Foreign Ownership on ESG
Since the 2000s, foreign investors have played a major role of shareholders in the Japanese market(Suto and Takehara, 2018).7 Compared to their domestic counterparts, foreign investors possess
little information about a firm’s prospects and/or business strategies (Cheung et al., 1999). Thus,
they tend to invest in firms with good corporate governance, high social trust, and a good reputation
to circumvent the problems associated with information asymmetry (Suto and Takehara, 2018).
Particularly, the Japanese institutional environment features cross-owned networks and interlocking
ownerships, wherein value-relevant information is shared exclusively within the grouping (Sheard,1991). In this environment, foreign investors can regard the level of information asymmetry or
disclosure transparency as an important factor affecting their investment decisions (Jiang and Kim,
2004). As social and environmental information may help foreign investors in decision-making (Khanet al., 2013), they are inclined to gravitate toward firms with high global credit ratings and positivesocial reputations to reduce information costs (Suto and Takehara, 2018), and they are likely to force
firms to establish transparent corporate governance and consequently encourage them to participate
in ESG practices to some extent (Oh et al., 2011).8 Moreover, socially responsible engagement might
be a way for companies to signal their trustworthiness (Siegel and Vitaliano, 2007). Considering
the riskiness and uncertainty of investing in a foreign country, foreign investors might show greater
preferences for firms with high social performance to avoid risk.
However, it can be difficult for foreign investors to monitor managerial decisions and pressure
managers to make socially responsible decisions. For instance, Guo et al. (2015) argue that the
distance makes it difficult for foreign investors to monitor a firm’s accounting department; thus, firms
with high foreign ownership are more likely to engage in earnings management than firms with low
78

Suto and Takehara (2018) find that shareholdings by foreign investors rose from 4.7% in 1990 to 18.8% in 2000. Aftera temporary drop during the global financial crisis, foreign ownership grew to 30.1% in 2016.
Prior studies document the monitoring role of foreign investors and suggest that foreign investors can ameliorate thelegal environment deficiency by improving firm-level governance (Aggarwal et al., 2011; Guo et al., 2015).

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foreign ownership. Additionally, significantly increased foreign ownership may allow foreign ownermanagers to become entrenched and pursue opportunistic behaviors in Japan (Ferris and Park, 2005).
Previous literature has documented a nonlinear relationship between foreign ownership and enterprise
performance (Akimova and Schwödiauer, 2004) or firm value (Ferris and Park, 2005), which showsthat foreign owners may also use their influence to siphon off earnings and profits when acquiring acontrolling stake in a company.9 Thus, it is plausible to expect a nonlinear relationship between foreign
ownership and ESG performance in Japan. As foreign equity ownership increases, the monitoringrole likewise increases, which may lead to an improvement in ESG. However, high foreign ownershiplevels may result in managerial entrenchment and negatively affect social performance. Hence, I
hypothesize:
H1b There is a nonlinear (inverted U-shaped) relationship between foreign ownership and ESG
performance.
Effects of Managerial Ownership on ESG
Previous studies have identified two effects of managerial ownership on managers’ incentives: theincentive alignment effect and the management entrenchment effect (Morck et al., 1988; Lennox,
2005; Shuto and Takada, 2010). According to the agency theory (Jensen and Meckling, 1976),
providing stock to managers can help mitigate agency problems by aligning their interests with thoseof the shareholders. Therefore, the incentive alignment effect suggests that managers with significant
shareholdings would make decisions that maximize shareholder wealth (McConnell and Servaes,
1990; Oh et al., 2017). Concerns for the longer term may motivate managers to engage in social
activities to enhance quality products and services and avoid negative reputations stemming from ESG
controversies (Johnson and Greening, 1999). Consistent with this argument, Johnson and Greening(1999) find that top management equity is positively related to the product quality dimension of CSP.
By contrast, the management entrenchment effect suggests that managers with greater ownership arelikely to have greater control over firms and will entrench themselves for their own interests (Morcket al., 1988; McClelland et al. 2012). If this is the case, firm managers with greater shareholdings
may engage in opportunistic behavior for self-serving purposes (Oh et al., 2017). As mentioned
before, cross-shareholdings (e.g., Keiretsu in Japan) are very common in Japan. This could enhance
managerial entrenchment and insulate managers from market interference in corporate control, suchas in hostile takeovers (Isagawa, 2007). This may allow managers to pursue their personal agendas at
the expense of other stakeholders. Consequently, managerial ownership is expected to be negatively
associated with socially responsible performance. Oh et al. (2011) support this argument and provide
evidence that managers from Korean Chaebol (similar to Japanese Keiretsu) firms with significant
9

Specifically, Akimova and Schwödiauer (2004) find that the impact of foreign ownership on firm performance (sales
per employee) is positive only up to a level that falls short of majority ownership. Ferris and Park (2005) find that firm
value rises until foreign ownership reaches approximately 40%, and then it begins to decline.

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shares are likely to overuse their power given by ownership and thus disengage from CSR.
Considering the above two effects of managerial ownership, I conjecture that the relationship between
managerial ownership and ESG performance could be nonlinear. Specifically, Teshima and Shuto(2008) find that the relationship between a manager’s shareholding and the level of effort to pursue
shareholders’ interests is positive for low and high levels of managerial ownership, and the slope
becomes flatter or negative for moderate levels of ownership. Thus, the entrenchment effect would
be dominant for intermediate levels of managerial ownership, while the alignment effect would
be dominant for low and high levels of ownership (Shuto and Takada, 2010). If managers have an
extremely low shareholding, they are unlikely to become entrenched because they cannot take controlof the firm. As managerial ownership increases from a low to an intermediate level, managers tend to
be entrenched in opportunistic behaviors to serve their own interests by reducing social investments
because they are less likely to be disciplined. Hence, worse ESG performance can be expected forintermediate levels of managerial ownership. In contrast, a manager with a sufficiently large numberof shares has strong incentives to act in line with shareholders’ interests by promoting long-term
investments such as ESG.10 Therefore, I hypothesize the following:
H1c There is a nonlinear (U-shaped) relationship between managerial ownership and ESG
performance.
Relationship between ESG and Corporate Financial Performance
A common question for business managers is whether “more is better.” In the ESG domain, twoelements need to be addressed to answer this question: rewards and costs. Specifically, “reward”
returned to the firm by stakeholders is correlated with the utility that those stakeholders experiencefrom the firm’s social output (Marom, 2006). This utility function can be characterized as adiminishing marginal utility function, which means that the marginal value of the perceived utilityof social output will decrease. When the scope and extent of corporate social responsiveness straybeyond stakeholder management, they are likely to regard ESG as an over-investment because such
redundant social concerns may have little or no relation to a firm’s stakeholder relations (Brammer
and Millington, 2008). Therefore, stakeholders may believe that the firm distracts itself from the core10

One may argue that not all shareholders are in favor of ESG. As the returns from ESG investments are expected to berealized in the long period, shareholders who care about the long-term values can be willing to let managers promote
ESG engagements. For instance, the Global Steering Group for Impact Investment (2019) conducted a survey about
impact investing which aims to create positive social and environmental impact while generating financial returns at
the same time. Their report in 2019 presents the increase in the balance of impact investing in Japan (from 71.8 billion
JPY in 2017 to 317.9 billion JPY in 2019) and documents the significance of impact investing from the perspectiveof both entrepreneurs and investors, suggesting that both institutional and individual investors show great interests ininvesting in ESG firms. Moreover, previous studies (please see Murashima, 2020) also find that Japanese institutional
investors can react strongly to negative ESG-related news, showing that institutional investors are concerned about
ESG controversies. Therefore, I conjecture that due to the incentive alignment, executives may be more likely toemploy firm resources towards ESG investments for long-term profitability and protect firms from reputation risks
caused by socially irresponsible activities.

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business and thus perceive less value addition gained from ESG practices (Sun et al., 2019).
On the other hand, the cost of managing ESG engagements could become extraordinarily high as
the ESG levels increase to a high extent for several reasons. First, socially responsible activities
consume considerable corporate resources, and the resource allocation could become increasingly
demanding because of the increased competition between social activities and other core business
units (Brammer and Millington, 2008). Second, agency costs in terms of stakeholders’ concerns are
expected to become more significant with increased ESG levels. Excessive ESG performance, whichsurpasses the levels that key stakeholders can tolerate, may lead to great concerns about managerial
misconduct or misuse of corporate resources, resulting in increased agency costs (Wang et al., 2008).
Third, firms can use cost-effective equipment for ESG practices (e.g., environmental management)in the beginning while they need to introduce new cost-ineffective equipment to improve social andenvironmental performance in the future (Fuji et al., 2013). Therefore, it is reasonable that firms witha high level of ESG investment are likely to have a relatively low financial performance because thecosts may outweigh the rewards (Meier et al., 2021). Hence, I hypothesize as follows:
H2 Increased ESG performance displays an inverted U-shaped relationship with corporate financial
performance.
3. Research Design
Sample and Data
I obtain the financial statements and stock data from the Nikkei NEEDS Financial QUEST database.
ESG data is taken from the Refinitiv EIKON database. I first exclude firms working in banking,securities, and insurance. I then drop firms that changed accounting period during the analysis period
and delete observations with the number of months in a fiscal period not equal to 12. Next, I exclude
firm-years with missing data for variables used in my empirical models and delete observations withnegative equity. The above procedures result in a final sample of 4,337 firm-year observations from2002 to 2017 for Hypothesis 1 and a final sample of 4,003 firm-year observations from 2002 to 2017
for Hypothesis 2.11 I then winsorize all continuous variables that lie in the upper or lower 1% of the
distribution.
Dependent and Independent Variables
ESG Performance
In line with previous ESG literature, I measure ESG performance by ESG scores obtained fromthe Thomson Reuters’ Refinitiv Eikon database (Sassen et al., 2016; Aouadi and Marsat, 2018).
Using more than 500 data points and 186 comparable measures, Refinitiv provides comprehensive,transparent, and objective ESG scores to measure a company’s relative ESG performance.
11

The final sample sizes of four measures of corporate financial performance are different, which are shown in Panel B
of Table 1.

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Refinitiv classifies non-financial data into the following three pillars: environmental, social, andcorporate governance performance. The environmental pillar score (ENV) measures a company’s
performance on emission, innovation, and resource use. The social pillar score (SOC) measures acompany’s performance on community, human rights, product responsibility, and workforce. The
governance pillar score (GOV) measures a company’s performance on CSR strategy, management,
and shareholders. Besides, Refinitiv provides the ESG controversies score (CONTR) which captures
negative media scandals.
Following Demers et al. (2021), I use the comprehensive ESG score (ESG) which is a relative sum of
the category weights of environmental, social, and corporate governance performance. Besides, I also
include the above four ESG pillars in the data analyses.
Ownership Structure
Following Oh et al. (2011) and Oh et al. (2017), I measure institutional ownership (INS_OWN)
and foreign ownership (Foreign_OWN) by taking the proportion of shareholdings by institutional
investors and the proportion of shareholdings by foreign investors, respectively. Besides, to capture
the ownership by management (MANA_OWN), I follow Shuto and Takada (2010) to use the fractionof the shares owned by all directors on the board.
Corporate Financial Performance
Four measures are generated to estimate corporate financial performance based on Aouadi and Marsat(2018) and Ikram et al. (2019). Specifically, Tobin’s Q (Q) is measured as the ratio of the sum of themarket value of equity and the book value of debt to the book value of total assets. Log of Tobin’s
Q (LnQ2) represents the natural log of the alternative Q ratio, which is the book value of total assets
minus the book value of equity and balance sheet deferred taxes plus the market value of equity,
all divided by the book value of total assets. Operating income on assets (OIA) is calculated as theoperating income divided by total assets. Furthermore, I include return on equity (ROE) as the ratio of
net income to shareholders’ equity.
Regression Models
Ownership Structure and ESG Performance
To estimate the relationship between ownership structure and ESG performance, I follow Oh et al.
(2017) to use the quadratic equation in OLS regression with robust standard errors to correct forheteroskedasticity. The equation estimated for this analysis is as follows:(1)－ 12 －OSAKA ECONOMIC PAPERS

Vol. 72 No. 2

where i represents individual firms and t denotes time periods (year). To capture the nonlinear pattern,
I include the quadric terms of three variables regarding ownership structure. Other variables arecontrol variables that have been commonly used in previous studies (Khan et al., 2013; Oh et al.,2017). Specifically, firm size (SIZE) is measured as the natural log of total assets. Return on assets(ROA) represents the firm performance, computed by income before extraordinary items divided
by lagged total assets. Financial leverage (LEV) is the ratio of the book value of total debts to total
assets. Besides, I also include year and industry fixed effects. According to the hypotheses, the sign ofquadratic terms indicates whether the quadratic curve is U-shaped or inversely U-shaped.
ESG Performance and Corporate Financial Performance
Following Aouadi and Marsat (2018), Sun et al. (2019), and Meier et al. (2021), I use the following
equation to estimate the relationship between ESG performance and firm financial performance:

(2)where sales growth (GROWTH) is captured as the ratio of sales in the current year to the prior year.
R&D expense ratio (RD) is measured as the ratio of R&D expenditure to total sales. Advertisingexpense ratio (AD) is measured as the ratio of advertising expense to total sales. Capital expenditure(CAPEX) represents total capital expenditure divided by total assets. Dividend yield (DIV) represents
dividend per share divided by stock price per share. To avoid endogeneity, I use the one-year-ahead
corporate financial performance (CFPi,t+1, which represents four measures of financial performance) as
the dependent variable. ESG and ESG2 are the independent variable and its square, respectively. Basedon the hypothesis, the coefficient of ESG2 captures the inverted U-shaped pattern and thus is expected
to be significantly negative.
4. Results
Descriptive Statistics
Table 1 reports descriptive statistics for the variables under analysis. Specifically, Panel A shows
descriptive statistics for Hypothesis 1 and Panel B shows descriptive statistics for Hypothesis 2. As
shown in Panel A, the mean (median) overall Refinitiv ESG score for sample firms is approximately
0.404 (0.406). The average institutional ownership is 32.5% and the mean of foreign ownership is
26.2%. The managerial ownership has a range from 0% to 69.9%, with a mean of 1.5% and a medianof 0.1%. The above results indicate that managerial ownership is less than institutional and foreign
ownership.12
12This result is very similar to the statistic reported by Shuto and Iwasaki (2014). In their descriptive statistics,
managerial ownership has a mean of 2.4% and a median of 0.4%. Moreover, their results also show that managerial
ownership in Japanese firms is less than institutional and foreign shareholdings.

September 2022

Reexamining Ownership Structure, ESG Engagements, and Corporate Financial Performance: The Nonlinear Relationship in Japan－ 13 －

Panel B shows that Tobin’s Q has a mean of 1.357 and a median of 1.143, while the average LnQ2 is
0.207 and the mean of OIA is 0.065. The average ROE is 8.1% with a median of 8%. Other control
variables exhibit similar descriptive statistics to estimates by previous literature. For example, sales
growth (mean 1.041) varies from 0.41 to 2.286, with a median of 1.034, which is similar to thedescriptive statistics of Aouadi and Marsat (2018).13
Table 1 Descriptive Statistics
Panel A: Descriptive Statistics for Hypothesis 1
N
Mean
ESG
4,337
.404
INS_OWN
4,337.325
Foreign_OWN
4,337
.262
MANA_OWN
4,337
.015
SIZE
4,337
13.023
ROA
4,337
.044
LEV
4,337
.509
Panel B: Descriptive Statistics for Hypothesis 2
N
Mean
Q
4,003
1.357
LnQ2
4,003
.207
OIA
4,325
.065
ROE
4,338
.081
ESG
4,338
.403
SIZE
4,338
13.032
ROA
4,338
.044
LEV
4,338
.508
GROWTH
4,338
1.041
RD
4,338
.028
AD
4,338
.011
CAPIX
4,338
.05
DIV
4,338
.123

SD
.201
.113
.111
.051
.909
.041
.199

Min
.035
.009
.004
0
9.514
-.251
.07

p25
.235
.249
.18
0
12.363.02.354

Median
.406
.338
.256
.001
12.984
.037
.52

p75
.568
.41
.338
.003
13.718
.061
.667

Max
.85
.618
.541
.699
14.861
.233
.967

SD
.771
.373
.051
.084
.201
.911
.041
.199
.14
.038
.021
.034
.899

Min
.466
-.718
-.245
-1.06
.035
9.514
-.251
.07
.41
0
0
0
0

p25
.984
-.031
.033
.049
.233
12.372
.02
.353
.981
.001
0
.027
.008

Median
1.143
.121
.056
.08
.405
12.993
.037
.519
1.034
.016
0
.044
.016

p75
1.438
.351
.087
.115
.566
13.737
.061
.666
1.093
.038
.016
.064
.025

Max
10.066
2.307
.266
.465
.85
14.861
.233
.967
2.286
.269
.155
.245
18.971

Table 2 presents the correlation matrix. As shown in Table 2, ESG is significantly positively correlatedwith institutional ownership and foreign ownership at the 1% level (with the coefficient of 0.155 and0.262, respectively), while managerial ownership is negatively correlated with ESG (-0.178) at the
1% level. The above results are consistent with the correlation results reported by Oh et al. (2011).
Besides, all financial performance measures are negatively associated with ESG performance at the
1% level, which is consistent with Ooi et al. (2021).14
Results of Hypothesis 1
Table 3 reports the results of regression analyses examining the nonlinear relationship between
ownership structure and ESG performance. To estimate the empirical model, I run stepwise robust
13

In the descriptive statistics of Aouadi and Marsat (2018), sales growth ranges from 0.488 to 3.744, with a mean of 1.126
and a median of 1.090.
14
Specifically, Ooi et al. (2021) report that stakeholder CSR and environmental CSR are negatively related to Tobin’s Q
in Pearson correlation test.

0.155***(2) INS_OWN

0.368***

1.000

(2)

1.000

(3)

(4)

0.079***

0.257***

0.897***

1.000

0.226***

0.257***

0.308***

0.103***

0.301***

1.000

(6)

0.093***

0.193***

0.249***

0.060***

0.203***
0.045***

0.086***

0.201***-0.075*** 0.113***0.125***

0.059***

0.131***

0.202***

0.116***

0.271***-0.186*** -0.090*** -0.096*** 0.019***0.148***-0.267*** 0.210***0.067***-0.121*** -0.038*** 0.182***

0.038***

0.103***

0.247***

0.691***

0.113***

0.205***

0.244***

0.271***(5)

0.726***

0.207***

1.000

(8)

0.289***

1.000

(9)

1.000

(10)

(11)

0.249***

0.134***

0.133***

0.107***

0.099***
0.067***

0.048***

0.015***

0.339***-0.027*** 1.000

(12)

(13)

0.090***

0.077***

0.099***-0.016*** 0.041***0.016***-0.101*** 0.040***

1.000

(14)

-0.038*** 0.049***-0.010*** 0.030***

0.003-0.096*** -0.247*** -0.021*** 1.000-0.089*** 0.105***

0.153***

0.073***-0.105*** -0.097*** 0.178***0.321***-0.244*** -0.051*** -0.101*** -0.250*** 1.000

0.930***

0.290***

0.682***

1.000

(7)

Note: This table reports the correlations for the sample. *, **, and *** refer to significance level at 10%, 5%, and 1%, respectively.

0.047***(16) DIV-0.095*** 0.081***0.007(12) GROWTH(13) RD

0.039***-0.068*** -0.027*** 0.086***

0.262***(11) LEV(14) AD

0.139***(10) ROA(15) CAPIX-0.111*** 0.034***

0.113***

0.442***(9) SIZE

0.563***-0.075*** 0.074***(8) ROE

0.237***-0.076*** -0.048*** 0.240***-0.093*** 0.013***(6) LnQ2(7) QIA-0.086*** -0.102*** 0.169***(5) Q(4) MANA_OWN -0.178*** -0.346*** -0.148*** 1.000(3) Foreign_OWN 0.262***1.000(1) ESG(1)

Table 2 Pearson Correlation Matrix

0.038***

1.000

(15)

1.000

(16)

－ 14 －OSAKA ECONOMIC PAPERS
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September 2022

Reexamining Ownership Structure, ESG Engagements, and Corporate Financial Performance: The Nonlinear Relationship in Japan－ 15 －

regressions by first examining three ownership measures and their quadratic terms individually andthen including all of them in the model.15 Specifically, Model 1 includes institutional ownership andits quadratic term. The coefficient of the linear term (INS_OWN) is significantly positive while thecoefficient of the quadratic term (INS_OWN2) is insignificant, showing that the effect of institutional
ownership on ESG is not in a nonlinear pattern. Model 2 includes foreign ownership and its seconddegree term. The significantly negative coefficient of the quadratic term (Foreign_OWN2) reflects
the possible existence of an inverted U-shaped relationship (β = -0.811, with a t-value of -4.992).
Following Meier et al. (2021), I further conduct the Lind and Mehlum test for the inverted U-shaped
relationship. The results show that both slopes are significant (p-value = 0.000 for the positive slope
and p-value = 0.001 for the negative slope), with a p-value of 0.001 for the overall test. All theseresults provide very strong support for the existence of an inverted U-shaped relationship between
foreign ownership and ESG. In Model 3, managerial ownership and its quadratic term are added. As
shown in column (3), the coefficient of the linear term (MANA_OWN) is significantly negative and thecoefficient of the quadratic term (MANA_OWN2) is significantly positive (β = 1.080, with a t-value of
4.772). Further results of the Lind and Mehlum test show that both slopes are significant (the p-values
for the negative slope and the positive slope are 0.000 and 0.000, respectively), with a p-value of 0.000
for the overall test. This indicates that the relationship between managerial ownership and ESG is asignificant U-shaped pattern.
Model 4 includes the linear term of institutional ownership, the linear term of foreign and managerial
ownership, and their quadratic terms. Model 5 represents the full regression equation which includes
all terms. As shown in columns (4)-(5), the coefficient of INS_OWN becomes insignificant after
adding INS_OWN2 and the incremental contribution is also insignificant.16 Overall, Table 3 supports
an inverted U-shaped relationship between foreign ownership and ESG and a U-shaped relationshipbetween managerial ownership and ESG, while the results show that the effect of institutional
ownership on ESG is positive and linear. Thus, the results in Table 3 support H1b and H1c.

15

The values of adjusted R-squares in Table 3 are consistent with those in Khan et al. (2013) that examine the effectsof corporate governance characteristics (such as ownership structures) on CSR disclosure performance. Specifically,
the values of adjusted R-squares for regressions of CSR disclosures on managerial ownership and foreign ownershipin their study are 0.446 and 0.447, respectively. In addition, the value of adjusted R-square for regression of CSR
disclosure on all corporate governance variables is 0.562.
16
The partial F-test shows the addition is insignificant (F = 0.65, p = 0.422).

－ 16 －OSAKA ECONOMIC PAPERS

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Table 3 Ownership Structure and ESG Performance(1)
ESG
INS_OWN
INS_OWN2(2)
ESG

0.182*(1.805)-0.056(-0.354)0.587***(6.358)-0.811***(-4.992)

Foreign_OWN
Foreign_OWN2
MANA_OWNMANA_OWN2
SIZE
ROA
LEV
Constant
Year, Industry
Observations
Adj. R2
F-stat(3)
ESG

0.111***(40.743)-0.625***(-9.387)
0.225***(13.752)-1.374***(-28.012)
Control
4,337
0.501
115.820.106***(35.458)-0.653***(-9.914)0.254***(15.259)-1.319***(-26.014)
Control
4,337
0.503
117.16-0.642***(-6.036)1.080***(4.772)0.111***(40.584)-0.593***(-8.870)0.234***(14.443)-1.298***(-26.715)
Control
4,337
0.502
115.72

(4)
ESG

(5)
ESG

0.084***(3.350)0.003(0.029)0.131(0.803)0.549***(5.589)-0.747***(-4.366)-0.621***(-5.612)1.098***(4.686)0.103***(34.489)-0.603***(-8.905)0.243***(14.870)-1.308***(-25.252)
Control
4,337
0.510
111.370.541***(5.569)-0.742***(-4.347)-0.624***(-5.642)
1.117***(4.755)0.103***(34.533)-0.595***(-8.953)0.243***(14.891)-1.315***(-25.729)
Control
4,337
0.510
113.47

Note: The p-values for the overall test of the Lind and Mehlum test for columns (2) and (3) are 0.001 and 0.000,
respectively. For column (4), the p-values for the overall test of the Lind and Mehlum test are 0.002 for Foreign_
OWN2 and 0.000 for MANA_OWN2, respectively. For column (5), the p-values for the overall test of the Lind and
Mehlum test are 0.002 for Foreign_OWN2 and 0.000 for MANA_OWN2, respectively. *p < .1, **p < .05, ***p < .01(two-sided).

Table 4 reports the results of relationship between ownership structure and ESG performance
regarding four ESG pillars.17 The results of coefficients of INS_OWN in columns (1)-(4) show that
there is a positive relationship between institutional ownership and each ESG pillar at less than the 5%
level. While the linear term of foreign ownership is significantly positive at the 1% level in columns(1)-(3) and significantly negative in column (4), the quadratic term (Foreign_OWN2) is significantly
negative only in column (1) (β = -0.634, with a t-value of -3.303) and column (3) (β = -1.222, with at-value of -4.918). Further results of the Lind and Mehlum test are statistically significant, suggesting
an inverted U-shaped relationship between foreign ownership and SOC (ENV) performance. The
results of managerial ownership (MANA_OWN) and its second-degree term (MANA_OWN2) showthat there is a U-shaped relationship between managerial ownership and first three ESG pillars: SOC,
GOV, and ENV performance, while there is no significant relationship between managerial ownershipand ESG controversies.

17

As Table 3 shows that the relationship between institutional ownership and ESG is linear, I only include the linear termof INS_OWN in Table 4.

September 2022

Reexamining Ownership Structure, ESG Engagements, and Corporate Financial Performance: The Nonlinear Relationship in Japan－ 17 －

Table 4 Ownership Structure and ESG Performance: ESG pillars

INS_OWN
Foreign_OWN
Foreign_OWN2
MANA_OWNMANA_OWN2
SIZE
ROA
LEV
Constant
Year, Industry
Observations
Adj. R2
F-stat

(1)
SOC

(2)
GOV

(3)
ENV

(4)
CONTR

0.063**(2.127)
0.396***(3.668)-0.634***(-3.303)-0.474***(-3.600)
0.987***(3.323)0.105***(28.780)-0.552***(-6.907)0.272***(14.223)-1.405***(-22.423)
Control
4,337
0.429
83.18

0.074**(2.169)0.513***(4.167)-0.272(-1.285)-0.563***(-4.242)0.997***(3.182)0.085***(21.216)-0.510***(-5.524)0.134***(6.373)-0.928***(-13.367)
Control
4,337
0.307
46.86

0.097***(2.659)0.658***(4.578)-1.222***(-4.918)-0.917***(-6.669)
1.586***(5.469)0.126***(30.583)-0.955***(-10.182)
0.307***(13.557)-1.608***(-19.598)
Control
4,337
0.529
142.710.070**(2.486)-0.277***(-3.000)
0.281*(1.709)0.062(0.891)-0.237(-1.645)-0.025***(-7.664)0.475***(5.696)-0.158***(-8.667)
1.376***(22.179)
Control
4,337
0.127
7.48

Note: For column (1), the p-values for the overall test of the Lind and Mehlum test for Foreign_OWN2 and MANA_OWN2
are 0.003 and 0.001, respectively. For column (2), the p-value for the overall test of the Lind and Mehlum test is
0.001 for MANA_OWN2. For column (3), the p-values for the overall test of the Lind and Mehlum test are 0.000
for Foreign_OWN2 and 0.000 for MANA_OWN2, respectively. For column (4), the p-value for the overall test of theLind and Mehlum test is 0.366 for Foreign_OWN2. *p < .1, **p < .05, ***p < .01 (two-sided).

Results of Hypothesis 2
Table 5 presents the results of regression analyses examining the nonlinear relationship between ESG
performance and corporate financial performance.18 As shown in columns (1)-(4), the results of thequadratic term of ESG (ESG2) are statistically significant at less than the 5% level, with the coefficientof -0.702 for Qt+1, -0.371 for LnQ2t+1, -0.025 for OIAt+1, and -0.069 for ROEt+1, respectively. These
results support a probable quadratic relationship between ESG and corporate financial performance.
Further results of the Lind and Mehlum test show that both slopes are significant when the dependent
variable is Qt+1 (with a p-value of 0.051 for the positive slope and a p-value of 0.00001 for thenegative slope), LnQ2t+1 (with a p-value of 0.060 for the positive slope and a p-value of 0.000 for thenegative slope), and ROEt+1 (with a p-value of 0.056 for the positive slope and a p-value of 0.004 forthe negative slope). Moreover, the p-values of the overall test in columns (1), (2), and (4) are less than
10%. These results indicate that the relationship between ESG and corporate financial performanceis an inverted U-shaped pattern. The results of other control variables are generally consistent with18

The values of adjusted R-squares in Table 5 are consistent with those of R-squares in Nollet et al. (2016) thatinvestigate the relationship between corporate social performance and financial performance. In their study, the valuesof R-squares range from 0.3551 to 0.6043 when dependent variables are accounting-based performance indicators.

－ 18 －OSAKA ECONOMIC PAPERS

Vol. 72 No. 2

previous studies (e.g., Aouadi and Marsat, 2018). For example, there is a significantly positive
relationship between ROA and one-year-ahead corporate financial performance. In addition, RD is
statistically positively related to Qt+1 and LnQ2t+1 while negatively related to OIAt+1.
Overall, the presence of a significant negative coefficient for ESG2 in Table 5 and the statisticallysignificant results of the Lind and Mehlum test reflect an inverted U-shaped relationship between ESG
and corporate financial performance. Thus, the results in Table 5 support H2.
Table 5 ESG Performance and Corporate Financial Performance

ESG
ESG2
SIZE
ROA
LEV
GROWTH
RD
AD
CAPIX
DIV
Constant
Year, Industry
Observations
Adj. R2
F-stat

(1)
Qt+1

(2)
LnQ2t+1(3)
OIAt+1(4)
ROEt+1

0.338*(1.765)-0.702***(-3.186)
0.088***(6.016)8.495***(12.738)
0.045(0.620)0.046(0.433)2.702***(4.219)0.899(1.051)0.476(1.110)-0.012*(-1.759)-0.352*(-1.654)
Control
4,003
0.446
30.25

0.157*(1.716)-0.371***(-3.445)0.067***(9.780)4.365***(15.493)0.054(1.444)-0.010(-0.206)
1.387***(4.162)0.202(0.659)0.278(1.521)-0.009**(-2.321)-0.888***(-8.486)
Control
4,003
0.524
62.99

0.013
(1.215)-0.025**(-2.024)0.005***(6.749)0.849***(30.231)-0.010***(-2.765)-0.001(-0.199)-0.068*(-1.683)
0.002(0.054)0.026(1.233)0.002***(3.739)-0.028**(-2.327)
Control
4,325
0.659
99.92

0.044*(1.650)-0.069**(-2.240)0.007***(3.659)1.237***(21.885)0.097***(10.562)-0.006(-0.564)-0.075(-0.971)0.020(0.425)-0.074*(-1.717)0.001*(1.953)-0.087***(-3.068)
Control
4,338
0.388
33.90

Note: The p-values for the overall test of the Lind and Mehlum test for columns (1)-(4) are 0.051, 0.060, 0.128, and 0.056,
respectively. *p < .1, **p < .05, ***p < .01 (two-sided).

The results of the relationship between ESG pillars and corporate financial performance are displayedin Table 6. All ESG pillars and their second-degree terms are included in each model. As shown incolumns (1) and (2), the coefficients of SOC2 are significantly negative and the coefficients of CONTR2
are significantly positive. Further results of the Lind and Mehlum test indicate that the p-values forthe overall test for SOC2 are 0.100 for column (1) and 0.005 for column (2), respectively, suggesting
an inverted U-shaped pattern at less than the 10% level. In addition, the p-values for the overall test
for CONTR2 are 0.030 for column (1) and 0.034 for column (2), respectively, indicating a U-shapedSeptember 2022

Reexamining Ownership Structure, ESG Engagements, and Corporate Financial Performance: The Nonlinear Relationship in Japan－ 19 －

relationship between ESG controversies and firm value. The results of columns (3) and (4) show thatthe coefficients of GOV2 are significantly negative at less than the 10% level. Further results of theLind and Mehlum test confirm that the governance pillar has an inverted U-shaped effect on financial
performance.

Table 6 ESG Performance and Corporate Financial Performance: ESG pillars

SOC
SOC2
GOV
GOV2
ENV
ENV2
CONTR
CONTR2SIZE
ROA
LEV
GROWTH
RD
AD
CAPIX
DIV
Constant
Year, Industry
Observations
Adj. R2
F-stat

(1)
Qt+1

(2)
LnQ2t+1(3)
OIAt+1(4)
ROEt+10.268(1.288)-0.413*(-1.851)
0.174(0.971)-0.181(-1.105)-0.229*(-1.737)
0.042(0.346)-0.533*(-1.888)0.438**(1.973)0.092***(6.255)8.401***(12.442)0.070(0.934)0.045(0.428)2.701***(4.268)0.831(0.956)0.502(1.169)-0.011(-1.535)-0.295(-1.352)
Control
4,003
0.446
28.25

0.232***(2.587)-0.306***(-2.922)0.112(1.414)-0.118(-1.526)-0.114*(-1.760)-0.031(-0.492)-0.299*(-1.862)0.274**(2.199)0.070***(10.063)4.288***(15.046)
0.071*(1.853)-0.012(-0.237)
1.394***(4.230)0.183(0.588)0.269(1.471)-0.008*(-1.945)-0.908***(-8.149)
Control
4,003
0.527
57.82

0.006
(0.612)-0.009(-0.782)
0.018*(1.933)-0.017*(-1.822)-0.009(-1.347)0.001(0.192)-0.013(-0.712)0.015(1.078)0.006***(7.048)0.843***(29.899)-0.008**(-2.194)-0.002(-0.269)-0.067*(-1.654)0.002(0.080)0.028(1.270)0.002***(3.920)-0.036***(-2.674)
Control
4,325
0.660
94.03

0.002
(0.098)-0.031(-1.096)0.047**(2.351)-0.046**(-2.254)0.007(0.429)-0.004(-0.248)0.045(0.674)-0.015(-0.317)0.008***(3.892)1.231***(21.815)0.103***(10.982)-0.008(-0.761)-0.066(-0.845)0.049(1.049)-0.074*(-1.690)0.002**(2.304)-0.127***(-3.753)
Control
4,338
0.391
31.82

Note: For column (1), the p-values for the overall test of the Lind and Mehlum test for SOC2 and CONTR2 are 0.100 and
0.030, respectively. For column (2), the p-values for the overall test of the Lind and Mehlum test are 0.005 for
SOC2 and 0.034 for CONTR2, respectively. For column (3), the p-value for the overall test of the Lind and Mehlum
test is 0.059 for GOV2. For column (4), the p-value for the overall test of the Lind and Mehlum test is 0.023 for
GOV2. *p < .1, **p < .05, ***p < .01 (two-sided).

－ 20 －OSAKA ECONOMIC PAPERS

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Table 7 Robustness Tests
Panel A: Ownership Structure and ESG Performance
Alternative ESG measure 1(1)(2)
ESGequal
ESGequal
INS_OWN
INS_OWN2

0.226**(2.232)-0.137(-0.861)

Foreign_OWN2

Yes

Yes

-0.669***(-6.558)
1.155***(5.208)Yes

Control
4,337
0.517
123.75Control
4,337
0.519
125.64Control
4,337
0.519
124.92

MANA_OWNMANA_OWN2

Year, Industry
Observations
Adj. R2
F-stat(4)
ESGequal
0.079***(3.150)0.560***(6.062)-0.767***(-4.728)

Foreign_OWN

Other Control Variables(3)
ESGequal

0.521***(5.365)-0.708***(-4.166)-0.653***(-6.101)
1.192***(5.061)
Yes
Control
4,337
0.526
122.39Note: The p-values for the overall test of the Lind and Mehlum test for columns (2) and (3) are 0.001 and 0.000,
respectively. For column (4), the p-values for the overall test of the Lind and Mehlum test are 0.004 for Foreign_
OWN2 and 0.000 for MANA_OWN2, respectively. *p < .1, **p < .05, ***p < .01 (two-sided).
(1)
ESGC
INS_OWN
INS_OWN2

Alternative ESG measure 2
(2)
ESGC

0.150
(1.525)0.023(0.150)Foreign_OWN2

Yes

Yes

-0.648***(-6.290)
1.052***(4.775)
Yes

Control
4,337
0.466
95.32

Control
4,337
0.466
93.97

Control
4,337
0.467
93.81

MANA_OWNMANA_OWN2

Year, Industry
Observations
Adj. R2
F-stat(4)
ESGC
0.100***(4.010)0.560***(6.095)-0.815***(-5.015)

Foreign_OWN

Other Control Variables

(3)
ESGC

0.498***(5.144)-0.719***(-4.220)-0.618***(-5.785)
1.063***(4.671)
Yes
Control
4,337
0.474
92.46

Note: The p-values for the overall test of the Lind and Mehlum test for columns (2) and (3) are 0.0002 and 0.000,
respectively. For column (4), the p-values for the overall test of the Lind and Mehlum test are 0.001 for Foreign_
OWN2 and 0.000 for MANA_OWN2, respectively. *p < .1, **p < .05, ***p < .01 (two-sided).

September 2022

Reexamining Ownership Structure, ESG Engagements, and Corporate Financial Performance: The Nonlinear Relationship in Japan

Panel B: ESG Performance and Corporate Financial Performance
Alternative ESG measure 1
(1)
(2)
Qt+1
LnQ2t+1(3)
OIAt+1(4)
ROEt+1Other Control Variables

0.258(1.320)-0.609***(-2.753)
Yes

0.157*(1.712)-0.373***(-3.510)Yes

0.011(1.060)-0.024*(-1.958)
Yes

0.052**(2.021)-0.078***(-2.633)
Yes

Year, Industry
Observations
Adj. R2
F-statControl
4,003
0.446
30.40

Control
4,003
0.525
63.08

Control
4,325
0.659
99.84

Control
4,338
0.388
33.76

ESGequal
ESGequal2－ 21 －

Note: The p-values for the overall test of the Lind and Mehlum test for columns (1)-(4) are 0.117, 0.061, 0.165, and0.025, respectively. *p < .1, **p < .05, ***p < .01 (two-sided).
Alternative ESG measure 2

Other Control Variables

0.327*(1.652)-0.674***(-2.965)Yes

0.113(1.181)-0.294***(-2.601)
Yes

0.011(1.048)-0.021*(-1.731)Yes

0.039(1.433)-0.057*(-1.777)
Yes

Year, Industry
Observations
Adj. R2
F-statControl
4,003
0.445
30.18

Control
4,003
0.523
62.64

Control
4,325
0.659
99.39

Control
4,338
0.387
33.74

ESGC
ESGC2

Note: The p-values for the overall test of the Lind and Mehlum test for columns (1)-(4) are 0.063, 0.148, 0.163, and0.082, respectively. *p < .1, **p < .05, ***p < .01 (two-sided).

－ 22 －OSAKA ECONOMIC PAPERS

Vol. 72 No. 2

Robustness Test
To test the robustness, this study also conducts regressions based on alternative proxies for ESG
performance. Specifically, I first follow Aouadi and Marsat (2018) and Sassen et al. (2016) to calculate
an ESG score (ESGequal) which consists of an equally weighted average of the three ESG pillar
scores. My second alternative proxy for ESG performance is the comprehensive ESGC score (ESGC)
provided by Refinitiv, which is calculated as the weighted average of the ESG scores and ESG
controversies score per fiscal period. Overall, the results shown in Table 7 are qualitatively identical tothose reported in Table 3 and Table 5.
5. Conclusion
This study reexamines the relationship between ownership structure and ESG performance inJapan and investigates the effects of ESG on corporate financial performance. In particular, thisstudy challenges the traditional linear relationship between ownership structure and ESG as well as
the relationship between ESG and CFP shown in Japanese literature and provides supplementary
evidence on the nonlinear relationship. Following Oh et al. (2017), Sun et al. (2019), and Meier etal. (2021), I employ the quadratic equation in OLS regression with robust standard errors to test the
hypotheses. The results indicate an inverted U-shaped relationship between foreign ownership and
ESG performance and a U-shaped relationship between managerial ownership and ESG performance.
However, the effect of institutional ownership on ESG is positive and linear. Further results regarding
the ESG pillars indicate that the above foreign ownership-ESG link is significant only in the socialand environmental pillars, while the above managerial ownership-ESG link is significant in thesocial, governance, and environmental pillars. Moreover, I find that ESG links to corporate financial
performance through an inverted U-shaped pattern, and such relationships mainly result from thesocial pillar and governance pillar when the dependent variables are firm values (e.g., Tobin’s Q)
and profitability (e.g., operating income on assets and return on equity), respectively. Overall, thisstudy advances our understanding of the relationships between ownership structures and firms’ ESG
performance as well as the effects of ESG on financial performance in the Japanese capital market.
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ArticlesReexamining Ownership Structure, ESG Engagements, and Corporate Financial Performance:
The Nonlinear Relationship in Japan ････････････････････････････････････････････････････････････････････Wenjun Kuang

1

THE ECONOMIC SOCIETY OF OSAKA UNIVERSITYGRADUATE SCHOOL OF ECONOMICS, OSAKA UNIVERSITY